NZME shares plunge on ComCom news

NZME shares have sunk 24% after the Commerce Commission's early view that a merger with Fairfax New Zealand would concentrate too much power under one umbrella, irrespective of the financial gains. 

Traditional media companies have struggled to come to grips with shrinking newspaper audiences as they gave away their product for free online, where the likes of Google and Facebook have asserted dominance in digital advertising, while losing classified ad income streams to internet-based rivals such as Trade Me and eBay. NZME and Fairfax NZ have put a priority on building their digital newsrooms, saying that's where their future business is, though they've yet to make meaningful inroads with digital ad revenue making up just 4 percent of their combined sales. 

The shares fell to 50 cents, half the nominal $1 price when NZME was carved out of APN News & Media earlier this year, and valuing the company at $98 million after the regulator's draft determination came out against the proposed tie-up with rival Fairfax NZ. 

"It's not very liquid. If someone wants to desperately get out they'll get whacked," said Matt Goodson, managing director at Salt Funds Management. "If the merger was to get up, it would make a material difference to Fairfax NZ and NZME for a period of time before revenues and profits get competed away from new media. Even with the merger, every analyst in the market would have revenues and profit being competed away over time - it's just a question over the glide-path."

The commission's opposition to the NZME/Fairfax tie-up comes a week after it questioned the market dominance of a proposed merger between Vodafone New Zealand and Sky Network Television, another sector in a state of upheaval. 

Mr Goodson didn't see the two preliminary decisions as signalling a change in the regulator's stance on mergers and acquisitions, given it waved through Z Energy's purchase of the rival Caltex chain, but that it was interesting that it came down "against two pieces of M&A in sectors with rapid change and facing significant issues". 

On the NZME/Fairfax merger, Mr Goodson expects it will come down to points on law around whether the regulator's qualitative assessments on issues such as the breadth and quality of journalism were properly considered, and could ultimately be decided by a judge. 

The commission accepted that the merger was a net positive with the estimated savings by cutting duplicated roles at the two companies offsetting quantifiable detriments such as price increases and wealth transfer to foreign shareholders, however, it said "the level of media concentration brought about by the proposed merger would not be in the public interest". 

Fairfax and NZME said they were of the view that the regulator "failed to properly take into account the diversity of opinions that will continue post-transaction in an increasingly converged digital world" and will put forward their case in the next round of submissions. 

Shares of Fairfax New Zealand's Australian parent, Fairfax Media Group, rose 1.6 percent to 81.75 Australian cents on the ASX. 

The Commerce Commission says a proposed merger of New Zealand’s two biggest media companies will substantially lessen competition and lead to reduced editorial quality.

In  draft decision published this morning, the regulator said its preliminary view was to decline to authorise the merger.

The two companies had sought clearance or authorisation to combine their businesses in New Zealand, which include the two biggest news websites stuff.co.nz and nzherald.co.nz.

NZME owns eight daily and two weekly newspapers, 24 community publications, six magazine titles, ten radio stations and 38 websites.

Fairfax operates the largest print media network in New Zealand, featuring nine daily and three weekly newspapers, 61 community publications, 10 magazine titles and six websites.

Commission chairman Mark Berry said a merger of the two companies would lead to one company controlling nearly 90% of the print media market, a level of media concentration second only to China.

“All this would result in an unprecedented level of media concentration for a well-established liberal democracy.

“Our preliminary view is that competition would not be sufficiently robust to constrain a multi-media organisation, potentially with a single editorial voice, that would be the largest producer of national, regional and local news by some margin in New Zealand,” Dr Berry said.

“NZME and Fairfax each play a substantial role in influencing New Zealand’s news agenda. Competition between the parties drives content creation, increases the volume and variety of news available in New Zealand and assists with objectivity and accuracy in reporting. Our view is that the removal of this competitive tension would likely lead to a reduction in the quality and quantity of New Zealand news content both online and in print, with potential flow-on effects in television and radio.

“We recognise that the merger would achieve net financial benefits through organisational efficiencies. However, while we cannot quantify the detriments we see with respect to quality and plurality of the media, we consider that detriments resulting from increased concentration of media ownership in New Zealand would outweigh the quantified benefit we have calculated. In particular, the potential loss of plurality has weighed heavily in our draft decision. On this basis, we propose to decline the application.”

In a statement to the NZX, NZME said it and Fairfax “will now take time to review the Draft Determination in detail and provide further information to the NZCC to assist in working through its consideration of the issues that have been identified on a preliminary basis.”

The next step in the regulatory process involves submissions on the draft determination, which are due by November 22.

Cross-submissions are due by November 30.

The Commission is then considering holding a three-day conference for interested parties in Wellington from December 6, followed by further submissions.

The final decision is due by March 15 next year.